Greek economy 2014

1.
Greek Economy
Towards the Crisis
& a Plan for Recovery
October 2014

2.
Getting into crisis
Characteristics of the Greek Economy prior to the crisis
 High growth based on consumption and borrowing
 Reduced competitiveness of the Greek Economy
 “Twin Deficits” and high public debt
– High public deficit
– High current account deficit

11.
Need for Change
 The global financial crisis revealed the chronic problems of the Greek
Economy
 Structural problems
- Bureaucracy, inefficiency and corruption
 Growth model based on consumption and borrowing
- A large percentage of the production are goods and services which cannot be traded
internationally.
 Fiscal derailment and structural problems must now be tackled

12.
Borrowing upon conditionality
 The inability of Greece to tap the international financial markets forced the country to seek
borrowing from its European partners and the IMF.
 Loans are subject to conditionality. The Greek government signs a Memorandum of
Understanding, which details the specific fiscal, financial and structural policies to be
implemented, under the supervision of three international organisations:
– European Commission
– European Central Bank
– International Monetary Fund
1st Programme: 2010 May (2010-2013)
2nd Programme : 2012 March (2012-2016)
Loan: €245 billion
- € 198 billion by member-states of the Eurozone
- €47 billion by the IMF
Interest Rate: 3% (IMF) – 2% (Eurozone – after reduction)
– Lower than the country borrows from the markets
– Lower than the rate at which some member-states borrow in order to lend us

17.
Labour costs and price developments
The prices of domestically produced goods and services are decreasing at a lower rate relative to
wages. As a result, real incomes are further hurt.
Source:Eurostat
The reduction of prices does
not go hand-in-hand with the
reduction of wages, due to:
 simultaneous tax hikes
which increases production
costs
 limited competition in
markets
 rigidities in labour and
product markets
 delayed realisation that
the recession is not
temporary
 imported goods are used
as intermediates, mainly oil
-10
-5
0
5
10
15
GDP deflator Nominal unit labour cost

18.
Price developments
 Inflation in Greece was persistently higher than the Eurozone average until July
2011.
 Deflation started in March 2013, boosting real incomes but negatively impacting
the debt to GDP ratio.
2014 is expected to be the last year of deflation.
Source:Eurostat
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Inflation
Euro area (18 countries) Greece

20.
Greece implements structural reforms
Source: OECD, Economic Policy Reforms: Going for Growth 2012
Note: The response indicator is based on a score system, according to which every recommendation is assigned value “1” if
significant action has been taken during the year following the recommendation; otherwise, it is assigned value “0”. Thus,
the indicator is the ratio of the total number of years needed for the implementation of the action, to the total number of
years since the recommendation was made.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Responsiveness to Going for Growth recommendations across OECD
countries, 2011-2012
Responsiveness rate Responsiveness rate adjusted for the difficulty to undertake reform

21.
Structural reforms in implementing
the Memoranda of Understanding
• Fiscal Consolidation: Medium-term programme, expenditure ceilings for ministries, balanced
budgets in local authorities and sanction mechanisms, sanction mechanisms for state-owned
enterprises in cases of infringement.
• Pension Schemes: Increase of retirement age, pensions are linked to lifetime contributions,
streamlining rules for severance payments, revision of list of hazardous occupations and disability
criteria.
• Health: Integration of insurance funds, electronic prescribing of medication, increased use of
generic drugs, claw-back mechanism.
• Labour Market: Measures to facilitate flexible forms of work, reduction of businesses’ reporting to
the Labour Inspectorate, facilitation of firm-level contracts providing for wages below sectoral
agreements, abolition of automatic extension of sectoral collective agreements and reduction of
after-effects.
• Combating Tax-Evasion: Compulsory electronic submission of income tax declarations, new
information systems interlinking tax offices, compulsory rotation of directors of tax offices, semi-
autonomous general secretary for public revenues.
• Business Environment: Repeal of 30 major barriers to entrepreneurship, simplification of
procedures enabling business start-ups in one day.
• Public Administration reforms: public sector employment cut from over 950.000 in 2009, to less
than 750.000 in 2012 and projected to fall by a further 90.000 (13%) by 2016; introduction of
unified wage grid and staffing plans for the entire public sector with evaluation of all employees;
establishment of mobility scheme and mandatory exit targets; e-government.
• Regulated professions: 74% of restrictions have been abolished in 27 most important occupations/
economic activities.

31.
Challenges and risks
• Austerity measures have led a significant proportion of the Greek society to misery – risk of
disrupting social cohesion is serious.
• High rates of unemployment that persist in time and could lead to social upheaval, damage
the country’s potential output due to depreciation of human capital, and increase the risk of
long-term unemployed.
• Delays in important structural reforms, especially in the field of tax administration, with
consequent impact on revenues collection, on combating tax fraud as well as on the sense of
justice in society (see Social Justice in the EU – A Cross-national Comparison, Social Inclusion
Monitor Europe (SIM) – Index Report, November 2014)
• Lack of liquidity, which suffocates the real economy, combined with extensive burdening of
businesses and households with debts from previous years.
• Capacity constraints of the public administration in implementing necessary reforms.
• The international economic environment remains adverse, making it harder for Greece to
adjust.
• Sensitive political balance that gives way to uncertainty regarding the course of the Economic
Adjustment Programme.
• Inadequate and delayed response to the crisis by the EU and insistence on a model of
austerity.
• Deflation: although it supports real income and enhances competitiveness, it also has a
negative impact on debt
 According to official projections, 2013 can be the year when Greece starts overcoming the
recession and crisis, as long as necessary conditions are met. However, uncertainties still exist.

32.
Looking into the future
 Greece needs a new growth model.
 For sustainable growth, the new model needs to be based on robust
investments – rather than on consumption and borrowing, which was the
case until today!
 Broad social and political consensus have to be ensured, so as to allow
Greece to consistently plan and implement a new strategy, and to guarantee
the long-term prosperity of the country.
 The Greek society must also realise the need to change mentality, as well as
to support the structural reforms (for which there is broad consensus).

33.
Annex: Latest developments
Performance in 2013 better than expected:
• -3.9% GDP growth compared to expected -4.2%;
• 0.7% GDP surplus in the Current Account compared to an expected -0.8%;
• Unemployment rate has been declining over the last three months of the year,
after more than three years of constant increases;
• General Government balance -3.2% of GDP compared to a target of -4.1%;
• General Government primary surplus 0.8% of GDP compared to a target of 0%;
• 10-year bond yields declined by 298 bps in 2013;
• €6 bn. of public sector expenditure and tax refund arrears to private enterprises
and households cleared.

34.
Annex: Latest developments
Performance in 2014 is also promising:
• -0.3% GDP growth in Q2 2014 compared to -4.0% in Q2 2013;
• € 567 million Current Account surplus in Jan-July 2014, compared to € 398 mn. in Jan-July
2013;
• Unemployment rate remains on a decreasing path (2.4 p.p. cumulative decline since
peak);
• GG deficit -0.8 bn Euros in Jan-July 2014, compared to -2.7 bn Eurosin Jan-July 2013;
• GG primary surplus € 3.2 bn in Jan-July 2014, compared to € 1.7 bn in Jan-July 2013;
• 10-year bond yields declined further by 255 bps;
• In April, i.e. four years after having no access to the international capital markets, the
Greek sovereign raised €3 billion at a coupon rate of 4.75%, through the sale of 5-year
bonds that was almost seven times oversubscribed;
• Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5-
yr and 3-yr) in exchange for T-bills in September;
• In Q1 2014, the four systemic banks raised additional capital worth € 8.5 bn.,
comfortably in excess of the needs identified by the supervisor (€ 6.4 bn.), whereas two
of them have issued medium-term bonds for the first time since 2009, in order to boost
their liquidity.